Updated - HMV – a paradoxical ray of light for the retail sector?

Earlier this week we commented on the administration of HMV and Jessops, and the opportunity this creates for capital to be re-deployed from struggling ‘zombie’ businesses to more productive areas of the economic landscape. Following the administration of Blockbuster, the FT picked up the themes of our post with their article “Slaying zombies of UK retailing – Death of weakest chains is opportunity for new beginning”

The announcement that HMV has called in the administrators will come as no surprise to anyone with more than a passing interest in the retail sector.

Like Jessops (which called in the administrators last week), HMV was in a structural and terminal decline that started when the first digital track was downloaded more than a decade ago.

Whilst Jessops does not face competition in the digital form (other than in photo printing), the market for compact cameras has been decimated by the rise of the smart phone, and the market for higher end, specialist photography kit was always far too niche to support a business with an expansive nationwide store estate, particularly in a recession.

Battling zombies

If anything the real surprise is that both Jessops and HMV limped on for so long in a brutally tough retail climate. That they did manage to survive in the face of several years of mounting losses is, more than anything, a function of the banks.

For many years we have seen the UK banks support the ‘zombie’ economy – many big businesses (particularly in the retail sector) that would have otherwise folded, were kept alive by banks long after their shareholders were effectively wiped out.

Extend & Pretend

In our view this doesn’t reflect a newfound altruism amongst the banks, rather it reflects the parlous state of their balance sheets after the credit crunch. For years we have seen a culture of “extend and pretend” emanating from the banks – those businesses that could afford to meet their interest bills (albeit with interest rates at rock bottom) were given a stay of execution so that the loans could be held on the balance sheet at unrealistic valuations.

The banks could not afford to write these loans down to realistic levels – their balance sheets simply would not have been able to withstand the impact that a wholesale cleansing would have entailed.

If you love them, set them free

Whilst our sympathies go out to those directly affected by the doubtless large scale redundancies that will follow at HMV and Jessops, in our view it represents a long awaited ray of light in the beleaguered UK banking sector. Whilst it may sound Darwinian, defunct businesses (as HMV and Jessops were) should not live forever and letting them go to the wall represents a long overdue show of strength from the UK banks.

If they have the confidence and balance sheet strength to recognise these (inevitable) losses then we should start to see a long overdue cleansing of bank balance sheets – unrecoverable loans written off, lessons (hopefully) learned, and more capital available to support the healthy segment of the economy, companies which will no longer have to compete for market share with the “zombies”. Our Debt Advisory team, led by Bill Troup, is expert at helping companies with too much debt put in place a more appropriate financing structure , working with borrowers and their banks to get companies back on a sound financial footing and enable them to return to growth.

So many of the healthy, growing UK businesses that we work with have been trapped by the immobility of their banks or starved of capital over the last four to five years, and it is surely these companies that represent our best chance of driving the UK economy out of recession.


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